Investing.com -- Stock market euphoria is at levels not seen since the tech bubble, suggesting investors opt for some caution, according to Barclays (LON:BARC)' newly launched Equity Euphoria Indicator.
"Interestingly, with many drawing parallels between the AI revolution and the 2000s Tech bubble, the EEI is the most stretched since then, warranting some caution," Barclays analysts noted in their Volatility Outlook 2025 report.
The Equity Euphoria Indicator, which aims to capture the breadth and strength of 'animal spirits' among stocks using derivatives flow insights, has averaged around 7% with peaks of north of 10%.
Peaks aren't a regular occurrence as it "only happens less than 20% of the time that at least 10% of all stocks are in exuberant territory," the analysts said. During the Dotcom era and the Meme stock frenzy in 2020-21, Barclays' Equity Euphoria Indicator flagged over exuberance, but following the recent run in markets, the indicator is once again signaling that stocks are in 'euphoric territory.'
The indicator's current elevated reading suggests investors may be getting overly exuberant, potentially setting the stage for increased market volatility.
Market volatility for this year is likely to be shaped by contrasting forces.While pro-growth policies including the next step in the AI cycle, deregulation, and potential tax/rate cuts could drive markets higher, inflationary pressures from tariffs, immigration policies, and fiscal risks could create headwinds.
Extreme positioning in markets also adds to the potential for wild swings, the report suggested. With the bullish view towards U.S. equities and disdain for Europe is firmly embedded in the consensus, this crowded positioning "creates the potential for exacerbated volatility during market stress," it added.
